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The inflation tax

Dr Ron Paul looks at that insidious other tax.

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income
Americans the most. Simply put, printing money to pay for federal spending
dilutes the value of the dollar, which causes higher prices for goods and
services. Inflation may be an indirect tax, but it is very real- the individuals
who suffer most from cost of living increases certainly pay a “tax.”

Unfortunately no one in Washington,
especially those who defend the poor and the middle class, cares about this
subject. Instead, all we hear is that tax cuts for the rich are the source of
every economic ill in the country. Anyone truly concerned about the middle class
suffering from falling real wages, under-employment, a rising cost of living,
and a decreasing standard of living should pay a lot more attention to monetary
policy. Federal spending, deficits, and Federal Reserve mischief hurt the poor
while transferring wealth to the already rich. This is the real problem, and
raising taxes on those who produce wealth will only make conditions worse.

Borrowing money to cut the deficit is only marginally better than raising taxes.
It may delay the pain for a while, but the cost of government eventually must be
paid. Federal borrowing means the cost of interest is added, shifting the burden
to a different group than those who benefited and possibly even to another
generation. Eventually borrowing is always paid for through taxation.

The third option is for the Federal
Reserve to create credit to pay the bills Congress runs up. Nobody objects, and
most Members hope that deficits don’t really matter if the Fed accommodates
Congress by creating more money. Besides, interest payments to the Fed are lower
than they would be if funds were borrowed from the public, and payments can be
delayed indefinitely merely by creating more credit out of thin air to buy U.S.
treasuries. No need to soak the rich. A good deal, it seems, for everyone. But
is it?

The "tax" is paid when prices rise
as the result of a depreciating dollar. Savers and those living on fixed or low
incomes are hardest hit as the cost of living rises. Low and middle incomes
families suffer the most as they struggle to make ends meet while wealth is
literally transferred from the middle class to the wealthy. Government officials
stick to their claim that no significant inflation exists, even as certain
necessary costs are skyrocketing and incomes are stagnating.

The transfer of wealth comes as savers
and fixed income families lose purchasing power, large banks benefit, and
corporations receive plush contracts from the government-- as is the case with
military contractors. These companies use the newly printed money before it
circulates, while the middle class is forced to accept it at face value later
on. This becomes a huge hidden tax on the middle class, many of whom never
object to government spending in hopes that the political promises will be
fulfilled and they will receive some of the goodies. But surprise- it doesn’t
happen. The result instead is higher prices for prescription drugs, energy, and
other necessities. The freebies never come.

The moral of the story is that spending is always a tax. The inflation tax,
though hidden, only makes things worse. Taxing, borrowing, and inflating to
satisfy wealth transfers from the middle class to the rich in an effort to pay
for profligate government spending, can never make a nation wealthier. But it
certainly can make it poorer.

US Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. The leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives.

Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

See full archive of Ron Paul articles

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